Moody's Investor Services has downgraded Azerbaijan's issuer and senior unsecured debt ratings from 'Ba1' to 'Ba2' with a stable outlook, thus concluding the rating review that it initiated on May 19. The Southern Gas Corridor company, which is owned by the Azerbaijani state and was founded to finance a large-scale gas development spanning the Caucasus, Turkey and Europe, has also had its rating downgraded to the same level.
In a press statement, Moody's said the rating revision was based on the weakening of Azerbaijan's fiscal and economic strength as a result of low oil prices, the country's declining production potential, and its very weak banking system. However, the ratings agency expects that the large hydrocarbon projects currently underway, government support for the restructuring of the banking sector, and the growth in additional debt obligations will level off by 2020.
Initially a consequence of currency depreciation in 2015-2016, Baku's growing debt has most recently been exacerbated by support for state-owned enterprises such as the International Bank of Azerbaijan (IBA). After being rescued from default in early 2015, IBA has benefited from state support to the tune of AZN10bn (€5bn) to clean up its balance sheet of non-performing assets. In May, the lender defaulted on $3.3bn worth of foreign obligations, which were restructured so that the government would assume $2.45bn, according to Moody's.
Gross government debt has increased dramatically as a result in the last two years, from 12% of GDP at end-2014 to 51% of GDP at end-2016. Moody's expects that number to increase to 55% by end-2018.
Azerbaijan's sheet anchor, the sovereign oil fund Sofaz, continues to hold significant reserves that represent 88% of GDP, but financial demands on it have increased in light of the banking and economic problems in the country, which brings to light the blurred line between the state budget, Sofaz and state-owned companies, Moody's concludes.
In a written commentary on August 21, analyst Tim Ash opined that the IBA debt restructuring earlier this year was "the worst of both worlds. In the end, the liabilities were dumped on the sovereign balance sheet, but the way the deal was done still left a bitter taste in investors' mouths".